The month of May saw a number of events including an ominous US yield-curve inversion (short term bond yields higher than long term bond yields, not the norm), escalating trade wars between China and the US, slowing global growth, a large Emerging Market index rebalance and retreating risk-asset prices. For South Africans however, the period should be remembered for the events that didn’t take place as we lined up to exercise our democratic rights at the polls. Despite the ever-present negative rhetoric and uncertainty around South Africa and its fractured political state, we should all take huge comfort in how peaceful our election day was. By all accounts the election was materially free and fair – something that many a country across the globe cannot claim.

May Overview

Economic releases in the month of May were not of significant importance on their own, but collectively they continued to paint a bleak picture of activity in the South African economy. The consumer remains under pressure as evidenced by the stubbornly low level of inflation (year-on-year) which read 4.4%. Pairing this with a marginally positive 0.2% retail sales growth figure (year-on-year, versus 0.6% forecast) and we can perhaps only just detect a faint pulse at best.

Historically, rising oil prices and a weakening rand have both had a fairly high pass-through effect on local inflation, but this relationship has been waning of late – likely indicating the lack of discretionary income available to most employed South Africans. Further disappointment was found during a period whereby many other countries enjoy historically low unemployment figures, South Africa’s narrow definition crept up to 27.6%.

There is of course a gleaming silver lining as many of these indicators attempt to encompass a broad South-African society, and as such fall prey to the “flaw of averages”. Further, these metrics also demonstrate what has already occurred, thus any medium-term improvement is likely to gain significant momentum and be measured off this low base. As a leading indicator the Producer price inflation (PPI) has beaten forecasts for three consecutive months (printing 6.5% for April), although any significant improvement truly is in its infancy (if in existence at all).

Looking to monetary policy: some have viewed the current local rate environment as punitively high despite the pending Moody’s credit rating later this year. Conceivably, if inflation volatility remains low and the global macro environment continues a steady slow-down, the SARB may be inclined to cut rates (their Quarterly Projection Model is certainly leaning that way).

The rand was largely weaker although it did gain ground on the Great British Pound, a currency subject to almost as much political and policy uncertainty as South Africa (as elaborated upon next). Safe-haven status and improved economic readings of Japan benefitted demand for the Yen which strengthened substantially against the rand.

Politics dominated UK news in May, with Theresa May announcing that she was going to step-down as Prime Minister on June 7th; as well the European Parliament elections. In the UK, both Conservatives (15) and Labour (10) lost a number of seats, the Liberal Democrats gained 15 seats whilst the Brexit Party took the most (29) seats, mostly from UKIP. Markets took this to mean a greater likelihood of a no deal Brexit, as they perceived this as an increased chance of a hard-line Brexiteer becoming Prime Minister. On the economic front, data were mixed; unemployment fell to a new 44-year low of 3.8% in April and inflation came in at 2.1%, slightly below forecast. Manufacturing Purchasing Managers Index (PMI), however, dipped down to 53.1 in April, and data released on 3rd June shows this falling further to 49.4 in May (contraction territory). Services PMI picked up slightly with the reading rising to 50.4 in April from 48.9 in March.

Trade tension between the US and China took a downward turn again in May, with the US increasing the existing tariff on $200bn of Chinese imports from 10% to 25% and possibly imposing tariffs on the remaining $300bn of imports. China retaliated by increasing the tariff range from 5-10% to 5-25% on $60bn of US imports. The risk here is that this reduces future capital expenditure by companies, denting the jobs market and consumer confidence. For now, the jobs market is strong with April’s non-farm payrolls recording a 263k increase, much higher than expected; and consumer confidence is still going strong, recording an increase in May to 134 from 129 last month. Manufacturing PMI, however, fell in May to 50.6 nearing stagnation. US personal consumption expenditure (PCE), the Federal Reserve’s (Fed) preferred inflation measure was only 1.5%. At the May monetary policy meeting, no change to policy was made but they noted a willingness to cut rates if there was a material deterioration in the economic outlook.

Yet again manufacturing data in the Eurozone was poor, flash manufacturing PMI nudged down to 47.7 in May from 47.8 in April, still contractionary. Consumer confidence, however, picked-up in May to its highest level this year, well above the long-term average. Separately, in the European Parliamentary elections, there were positive results for the ‘EU project’ as Eurosceptic parties did not fare as well as expected (although did increase seats).

Japanese data readings released in May were strong, the preliminary reading of Q1 GDP growth surprised to the upside with a 0.5% reading (quarter-on-quarter), with markets expecting a 0.1% contraction. In addition, the CPI inflation rate jumped to 0.9% in April from 0.5% in March.

In Emerging Markets, oil prices fell sharply at the end of May a headwind for oil exporters across the region. The reasons for this were numerous, including: increased trade tensions, which are likely to feed through to dampened global demand for oil; and slightly increased US supply, and lower demand as inventories did not decrease as much as expected. In India, Narendra Modi’s party increased its parliamentary majority providing more clarity on the direction of policy. In China, the trade situation worsened and is likely to drag down growth further, although authorities have responded by trying to help banks lend more by cutting the amount they have to hold in cash, and putting more money in corporate and individuals’ pockets by cutting personal and corporate income taxes.

Over May, as the probability of a hard Brexit increased, the pound weakened significantly against most other currencies, down 3.3% against the US dollar, 2.8% versus the euro, 5.7% against the Japanese yen, 1.8% against the Australian dollar, 4.2% against the Brazilian real and 1.8% against the South African rand.

Asset Classes

Following April’s improved appetite for risk asset purchasing we saw yet another reversal of sentiment in the month of May as equities sold off in both USD and rand terms. Refuge lay in global bonds, property and cash. Despite this market backdrop it was the local Resources and Industrial super-sectors that disappointed most (falling -5.09% and -5.95% respectively) whilst Financials slipped 2.31% lower.

A summary of the month’s asset class performance is shown below:

GPS PERFORMANCE FEEDBACK – MAY 2019

GBP Asset Classes and Currency Performance

Global asset class performance measured in GBP benefitted more so from a weakening currency than a rise in asset prices. Fixed income and global property were the primary beneficiaries of slowing global growth, as well as uncertain political and monetary policy which reversed many of April’s gains.

USD Asset Classes and Currency Performance

As risk sentiment retreated the US dollar strengthened against most currencies except for those of Japan and Switzerland, pointing to not all being well in the US, a thesis further supported by the ominous US yield-curve inversion. As expected under such conditions global sovereign bonds performed best whilst the higher risk assets would have detracted from portfolio returns.